Economics

The euro crisis

Mario blinks

MOST adolescent boys grow out of playing chicken when they realise the winner of the game is not the bravest, but the one too stupid to be aware of the consequences of continuing to play.

During the euro-zone crisis, the European Central Bank (ECB), along with Germany, have excelled at the game, allowing the sovereign-debt crisis to teeter on the edge of disaster in order to push Greece (and Italy) to make deep fiscal cuts and undertake structural reforms. The tactic has worked—in large part because the ECB seemed credible in its role as the fearless lunatic. Most believed that the bank is so bound by its doctrine that it would rather risk calamity than start the printing presses. As a result, Italy ejected its government and started the long, hard climb back to competitiveness. Greece has been pushed to the very limits of what it can do.

After both Italy and Greece have blinked, will Mario Draghi, the president of the ECB, now blink too?

The answer is likely to come in the form of an announcement (possibly tomorrow, after the meeting if the bank's board) of how the ECB intends to deal with its holdings of Greek government debt. Most of these were bought in the open market at a deep discount to their face value. Yet the ECB has repeatedly insisted that it will not be subject to a “haircut” that will reduce the nominal value of its holdings. If it prevails, the ECB could in fact make a tidy profit—at a time when banks and other private holders of Greek debt are being asked to “voluntarily” agree to a bond swap that will reduce the value of their holdings by as much as 70%.

This does not only seem unfair, but creates two other problems. First, because the ECB is such a large holder of Greek debt, all other holders have to take a commensurately bigger loss on their holdings if Greece's debt burden is to be brought to 120% of GDP, the level the International Monetary Fund considers the limit of sustainability. Second, private investors will be reluctant to buy government bonds of any other troubled European nation if they believe that their holdings will be squeezed whenever official bodies such as the ECB step into the market. First signs of bond buying by the ECB would likely prompt a run for the exits, putting future bail-outs at risk.

So it did not come as a surprise that on February 7th word emerged that the ECB was considering writing down the value of its Greek bonds to the price it paid for them. The exact mechanism is not yet clear, but it could involve the bank selling the bonds to the European Financial Stability Facility, Europe's bail-out fund. The step would help Greece by reducing the debt it has to repay. But more important, it sends a powerful signal that the ECB is willing to be flexible to keep the euro zone intact.

Everybody on both sides of the ocean is asking, "When (not if) is it going to collapse?" The Fed is trying to hold out until the 2012 election, but that won't be easy. Obama has already asked for a $1.3T increase in the debt ceiling. One hears about the recovering economy and decreasing unemployment. Well, I've heard of Grimm's Fairy Tales too, but I don't believe them.

So EFSF is going to buy the ECB's holding in Greek bonds at a 30% discount, then accept a 30% haircut. I guess that's one way to get around the legal restrictions on the ECB. I foresee German resistance to such a plan though. First, it'd expand the member states' balance sheets immediately, since the EFSF has to borrow that money--around 35 billion or so. Second, buying a bunch of 30-year Greek bonds with real money seems a terrible deal. The political optics are definitely unfavorable. The arrangement might also be open to legal challenge from other creditors. The EFSF could be forced to take the same haircut as PSI. Perhaps most troubling if you're German is how it creates a backdoor to debt mutualization. Everyone else is going to demand that the ECB "give up the unfair profit"-the Spaniards, the Portugese, the Italians, and the Irish. Before you know it, the EFSF/ESM will be holding hundreds of billions in PIIGS bonds.

"During the euro-zone crisis, the European Central Bank (ECB), along with Germany, have excelled at the game, allowing the sovereign-debt crisis to teeter on the edge of disaster in order to push Greece (and Italy) to make deep fiscal cuts and undertake structural reforms."

So how come that so many "experts" wanted the ECB to act as a "lender of last resort" for countries, blaming Germany to behave economically suicidal and illiterate for not allowing the ECB to act like that? A "lender of last resort" role would have eased all the required reform pressure, and the ECB would have become a slave of the politicians' (under)performance. The result would have been a lot printing instead of reforms. Yes, The Economist, I am asking you since you!

All of us will have to pay for the Greek-failure, because if Greece only pays 30% to the bond-holders, then we “normal people” will be the ones paying the rest, either to the banks or to our state-tax-authorities.

The Greek politican’s way of living is so intelligent that you do not understand how they trap you and how they fool you.

Greece said from entering the EURO-group, please lend us your money, give us EUROS, give us lots of EUROS so we can have a nice life. And the banks gave Greece lots and lots of EUROS and got Greek-state-bonds as security.

And the Greek politicians laughed every day, sipping their wine and enjoying the peaceful political life in the sun. A strike now and then to push Greek salaries up to “European-level”. The Greek political parties all agreed that this salary-development was only “fair and decent” for such a well-educated and high productive country, which the politicians said Greece was.

Now Greece can’t repay and simply says “Sorry guys, we will PERHAPS pay you back 30%”. And the banks seem to agree. Are the bankers that stupid.

Greece promised last year to do lots of things which of course they did not do. Now this year they have “hard political negotiations in Athens” in front of BBC and CNN TV-cameras, and put up a great show how very hard they try to agree to promise to do the things they did not do last year. But the Greek politicians will only agree to do the things they agreed to do last year but did not do – ONLY IF they get another EUR 140 bn or more.

Who is so “political retarded” they do not understand the “Greek shadow-boxing” putting up a “great political show” for Europe.

If it had been a similar situation in my life, lending my money to my neighbour so he could buy a new car, a new TV, and lots of vacation-trips abroad. And after a while he says he can not pay all the money back to me. I would have taken his car, his TV and all the valuables he had.

Now, the banks sitting with the Greek-bonds will get only 30% repaid. Why don’t the banks say to Greece, you pay 100% back to us. Otherwise we want the valuables from you.

The banks should take the Greek valuables like the Greek railways, the Greek water-works, the Greek electricity-works, lots of beaches in Greece with building-permits, lots of Greek islands. What about taking half of Athens’ land-area – where the rich live – and charge the house-owners a fair rent of their ground-plots and make sure the rich Greeks living there pay the rent every year.

This would solve the problem to get more money back. And it would teach Greeks a lesson not to live like kings on other people’s money.

The Greek debt crisis was basically caused by Greeks not paying their taxes. And the richest Greeks were those who abused the system most. None of the solutions currently prosposed actually call them to account for their actions over decades. Instead, the financial burden is placed upon the poorest in Greek society and the European Union as a whole. Assuming that poor Greeks don't have too many Swiss bank accounts there is an obvious solution. All bank accounts held by Greeks in the European tax havens (Switzerland, Lichtenstein, Luxembourg, Channel Islands, etc.) should be frozen and then handed over to the ECB. These funds could then be used to pay off Greek national debt and as development aid to provide jobs in Greece. In order to ensure that no injustice was done, any Greeks who felt they had been hard done by could then attempt to get their funds restored by having their cases examined by the European Court of Auditors.

"...but the one too stupid to be aware of the consequences of continuing to play."
Really? I view it differently. They are sharks who try to turn their rotten investments into global ponzi scams. Eurozone bailout is a giant global ponzi scam, taking money away from our IMF and EFSF/ECB funds to save German and French rentiers. They are stealing our money!

Remember the history and ask yourself only a few questions concerning the last 100 years.

Was it correct that Russia had a communistic revolution.
Was it correct England and France competed against each other with saying “yes” to Hitler behind the others back.
Was it correct Germany got the Nazi-regime.
Was it correct that Japan brutally invaded China and the other countries.
Was it correct that the civil-war in Greece was won by the “non-communists”.
Who had to pay the price for all this, the people in the countries.

And today, it is Greece having these economical problems but IT IS GREECE’s OWN FAULT and Greece have to pay for that. Clever or stupid.

You lived over your income for many years, and now it’s time to pay back. If you can’t pay back, why shall we give you 70% of what you borrowed.

Hand over your valuables, it’s easy like that.

Snobbery is for those sitting in a restaurant and pretending being the “rich millionaire spender”, trying to pay with a credit-card that is already overdrawn and blocked, cought by the waiter to have no money, and not want to go out in the kitchen and do the dishing.

The banks sitting with the Greek-bonds will get only 30% repaid. Why don’t the banks say to Greece, you pay 100% back to us. Otherwise we want the valuables from you.

The banks should take the Greek valuables like the Greek railways, the Greek water-works, the Greek electricity-works, lots of beaches in Greece with building-permits, lots of Greek islands. What about taking half of Athens’ land-area – where the rich live – and charge the house-owners a fair rent of their ground-plots and make sure the rich Greeks living there pay the rent every year.

Why can’t banks be “practical” and push Greece this way and claim “real stuff” back for the "real EUROS" they gave Greece.

Now Greek politicians play their game and have nothing to loose. They know banks and Germany and France will help.

The focus on Greece is one-sided and skewed, even unfair. The lenders, banks in e.g. France and Germany, took on this risk voluntarily, at a premium even. In this sense debt is simply a bet, and the interest a risk-premium. Don't whine when you loose a bet!

Furthermore, the unholy alliance between regulators and the financial sector must be ended: Allowing banks to use Greek bonds as collatoral under Basel/Solvency rules was always wishful thinking, and made it good business for banks to "invest" in these "safe" assets in order to take on even more riskier bets.

To those who claim that it is simply the Greeks who have misinformed EU and been unable to levy taxes, I say this: WHy are you surprised? This was well known, and a key concern of Germany's at the founding of the Euro in the fist place!

In contrast to the private bondholders the ECB (European taxpayer) has not bought these bonds voluntarily, but because it wanted to save the banks and Greece. The banks can be happy that the ECB bought big parts of their toxic bonds. In the case of an Greek insolvency in 2009 they would have lost much more money. So, I don't see a reason why the ECB should have to participate in the bond cuts now. It seems to me however that TE only defends the interests of the private speculators and not the interest of the European taxpayers!

first of all, im so happy that stupidity is not something that is only found in greek politicians.
Now, i am greek and i know first hand what the situation was before the "bail out" and now. I am assuming you are from france, how much is the basic salary there? i dont think it is 750euros like it was here and definitely not 580euros thats going to become. Also, is your country able to cut so much and lower its deficit by 6% in 2yrs? Do you know that without the interests that we are paying for your help the deficit would be 2.5%, please remind me yours? Finaly we are a european country like it or not, we might lack the north snobbery, but for a country that lost a decate all of a sudden and the hopes and future of a whole generation vanished we are doing pretty well.
Thanks,
chris

No, it won't. Why?
Because the EFSF does not have a penny of equity to bear the losses. Any loss borne at the EFSF needs to be drawn from the guarantees of member states. How on earth is buying EFSF bonds (other than EU Banks financed by the LTRO) under these circumstances.

Beauty of circularity.......

and by the way, I am making myself unfavorable here, however, debt-mutalisation is going on - while I write.

Via Target2, via SMP, via LTRO, via ELA's and there is certainly more. With one ultimate backstopp, core taxpayers. The majority of which are German.

Do not kid yourself - the very second Angie appears to abandon the Euro, the whole edifice will implode in all our faces.

The real issue, it will prove beyond her control to keep up appearances for ever.

What about rewarding Greek politicians for the implementation of reforms... not only for empty promises and a lack of compliance? From my point of view, the ECB should defenitelly support the Greek haircut, it should not make profits with Greek bonds. But the ECB should wait and use potential support as an incentive and later as a reward for reforms.

@lord zoth: sure, bondholders should pay, but why the ECB should make a profit on the backs of the Greeks?

Ultimately this is about getting good governance for Greece, which Greeks mostly want but their politicians obstruct. Unsurprised that Greek politicians would rather starve their people that touch their lobbies. That's not an argument for starving the people till they get a decent government.

It's hard to seize the assets of a sovereign state, since most of them lie inside its own border. State properties that happen to situate in other countries are usually protected by sovereign immunity. Creditors cannot seize Greece's presidential plane, embassies, warships, Olympics team's equipment, and so forth. Central bank assets are also protected. If the Greek railway tries to buy something abroad though, I believe the money can be taken away, since the state owned company engages in commercial activities (not protected by sovereign immunity). Creditors in theory can attach petroleum shipments for Hellenic Petroleum as well.

Greece's situation is really rather unique. It's unclear to what extent--if at all--it enjoys sovereign immunity as regards to EU law. It's long been recognized that EU law has supremacy over national law. Creditors could conceivably win a judgement in a European court against the country forcing it turn over state properties. If that comes to pass, I think Greece would choose to leave the European Union instead.

Hi,
The euro crisis
„You pays your money and takes your choices“
Again, who pays? The economic problems with Greece necessitates Governments, Banks to cut there loses. Being a well known fact Banks never cut losses but pass them on. The open question is to whom, is it European pension funds or taxpayers and this being so, should not those concerned have a say?